OPINION | Reduction in Corporate Tax Rates: Undoing the Mistakes

Finance minister Nirmala Sitharaman has announced major relief to corporate sector and addressed the long-time demand of reducing the tax rates. The government expects that the recent announcement will increase the competitiveness of Indian market from the perspective of foreign investors and investment will flow to the country.

This mini tax budget sort of announcement should be viewed from two angles viz. relief to existing undertaking and incentive to new units. Effective tax rate of the entire base of companies reporting profits increased from 26.89 per cent for financial year 2016-17 to 29.49 per cent for financial year 2017-18 (source: Annexure 7 of the Receipt Budget 2017).

A 2.6 per cent rise in effective tax rate was mainly due to phasing out of profit-linked deductions and increase in Minimum Alternate Tax (MAT). If we compare the proposed effective tax rate of 25.17 per cent to the effective tax rate for financial year 2016-17 and recommendation of expert panel on direct tax code, then this tax cut doesn’t come as a surprise.

If we further dig the data, then effective tax rate for all the large corporations is already around 26.3 per cent and, therefore, this tax cut is not expected to provide a big relief to large companies. Though there could be some companies which benefit due to their structure and the manner in which they operate. In addition, concessional tax rate provisions are already there for companies with annual turnover of Rs 400 crore.

From a macroeconomic point of view, this tax cut for existing undertakings will benefit only when corporates decide to invest the surplus and this is dependent on economic outlook. Current economic slowdown is a result of decline in demand and in order to address this, efforts should have been made to leave more disposable income with middle class. Quite surprisingly, the government is not doing anything to address this concern.

Reducing tax rates for manufacturing companies set up after October 1, 2019 is a welcome step. So far. Make in India project has not succeeded in attracting manufacturing giants. This is despite availability of huge market and relatively cheap labour in our country.

Foreign players have often criticised high income tax rates in India and hopefully their concern will get addressed now. However, the finance minister should acknowledge the fact that tax rates are not the only factor that determine the business decisions and FPI outflow even after withdrawal of surcharge is an example. Reduction in MAT rates from 18 per cent to 15 per cent is also good for specially those companies that enjoy tax holidays but pay income tax under MAT provisions. Theoretically, MAT credit can be carried forward and utilised in future periods, but it impacts the investment decisions which are usually taken after considering present value of money.

The government’s responsiveness should be appreciated from the fact that the finance minister acted in a timely manner to address the concerns (e.g. surcharge on FPIs, increasing monetary limit for filing appeal in tax cases, rate cut etc.). However, frequent revision to the policy takes away the element of certainty which is essential.

(The author is a chartered accountant and anti-money laundering specialist. Views are personal)